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October 23, 2013

Advisors Optimistic About Clients’ Retirement, but Challenges Persist

Advisors are almost twice as likely as they were last year to say their clients understand how much they need to save to meet their retirement goals, and they’re overwhelmingly optimistic that they’ll be able to do so, according to a report released Thursday by Natixis Global Asset Management. Just 10% of advisors said their clients might have trouble providing for themselves in retirement.

However, advisors are finding challenges elsewhere. For one thing, the markets are still making generating income difficult. Fifty-six percent of advisors said it was hard to get strong investment performance for their retired clients with such low interest rates. More than half say it’s difficult to generate enough income and balance drawdowns with continued asset growth.

“They have to target a volatility level that will allow their clients to stay through these ups and downs in the market, so they don’t exit at the wrong time,” David Giunta, CEO of U.S. distribution, told ThinkAdvisor on Wednesday.

“They want to move away from the traditional 60/40 portfolio techniques and they really are starting to think more about overall portfolio construction that includes alternatives. They’re just struggling a little bit right now with how to include those alternatives and how to explain them to their clients.”

Almost 70% of respondents said they needed to replace traditional diversification and portfolio construction methods, but finding solutions in alternatives is also proving to be a challenge. Although 89% of respondents said they used alternatives with their clients at least occasionally, just a quarter use them regularly. Advisors said they find alternatives difficult to explain to clients or think clients feel they’re too risky. Difficulty justifying the expense and simply not understanding them well themselves were other reasons advisors gave for not using alternatives.

However, a survey of investors conducted by Natixis earlier this year found 72% would consider alternatives if their advisor recommended them.

“Some of their clients hear the word ‘alternatives’ and they get nervous,” Giunta said. “What we try to educate advisors on is that there’s so many of these alternative strategies within mutual funds that are fully liquid and have full transparency as well. They can really be nice complements to traditional asset classes to help smooth out volatility over the long term.”

Advisors who want to ease into a conversation about alternatives should show their clients what a portfolio would look like with both traditional and alternative investments, Giunta said. He suggested working with analysts or consultants who can provide model portfolios to show clients. Natixis’ Portfolio Research and Consultant Group does just that for their advisors. “The whole premise of what they look at is putting risk first. Instead of just targeting a potential return in the portfolio, target the level of risk that your client can withstand.”

Advisors are spending just 9% of their time on gaining new business, Natixis found. According to the report, 43% of advisors aren’t looking for new business from younger clients and 65% said they don’t have time to look for new clients. Instead, general administrative tasks and compliance duties are taking up almost twice as much of their time as looking for new clients.

With more than a third of their clients over 67, this could be a problem. Clients under 45 account for just 22% of respondents’ client base.

“These general administrative tasks, compliance tasks do overwhelm the business development portion of their time. A lot of them are taking a team approach where some can focus more on money management and administrative tasks and other can focus on business development. It’s going to be very important to get that next generation of investors.”

Giunta suggested that the way to attract younger investors was, surprisingly, with retirement business. “Early on in their career they start IRAs or 401(k)s. I’ve found that retirement business is a good way to approach younger investors. Then over time as they accumulate assets, you can introduce them to other product categories as well.

“What’s happening more and more is that as they get into the work force, they’re encouraged right away to start saving through 401(k)s or to set up IRAs. I believe that education is happening a lot sooner and we’re going to see that take hold with more younger individuals. If they really do take to that education, they’re going to put away retirement dollars, and then over time that should grow.”

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